Finance Ministry: EPFO wants to reinvest ETF redemption proceeds back into equities; here’s why

The Employees’ Provident Fund Organisation (EPFO) has initiated discussions with the finance ministry regarding the potential reinvestment of its entire redemption proceeds from exchange-traded funds (ETFs) back into the stock market. Sources familiar with the matter told ET that the EPFO has put forth strategies aimed at optimizing equity returns while safeguarding gains against market volatility.
The EPFO’s apex decision-making body, the central board of trustees, authorized the organization during its late March meeting to consider reinvesting the redemption proceeds derived from its ETF investments. However, the implementation of this initiative, which would increase the inflow of retirement funds into equities, necessitates approval from the finance ministry. According to the investment guidelines set by the finance ministry, the EPFO can allocate between 5% and 15% of its income towards equities and related investments.

The EPFO is actively advocating for revisions to the existing ETF investment guidelines. Specifically, the organization has suggested a shift to daily redemption of ETF units, linked to the return benchmark of government securities, as opposed to the current periodic system. This proposition also entails benchmarking ETF returns to the average five-year performance of the Sensex, a departure from the prevailing four-year comparison, as disclosed by officials familiar with the situation.
Upon reaching a consensus between the finance and labour ministries, the EPFO will present the final proposal to the finance ministry for its endorsement. An official told ET that the EPFO asserts the necessity for the holding-period return of the proposed redeemed ETF units to surpass the yield on the 10-year benchmark government security by a margin exceeding 100 basis points.
“Further, EPFO has also proposed that the holding-period returns of the units to be redeemed should be calculated on the basis of average five-year returns of the Sensex and they must be allowed redemption on a daily basis,” the official said.

This adjustment would align ETF returns with historical long-term averages, as against the present four-year redemption cycle, thereby potentially enhancing returns for subscribers. The labour ministry and the EPFO have chosen not to respond to inquiries by ET.
It’s worth noting that the EPFO initiated investments in ETFs linked to the Nifty 50 and BSE Sensex in August 2015, initially allocating 5%, later raising the limit. As of January 31, it had invested 10% of its proceeds in ETFs, with the aim of achieving the maximum permissible threshold of 15%, provided the authority permits reinvestment of redemption proceeds into ETFs.
Presently, the EPFO has an investment corpus of Rs 12.53 lakh crore, with approximately Rs 1.25 lakh crore directed towards equities and related investments.